UK start-ups must consider options as Future Fund maturity date approaches

It remains to be seen whether the UK government’s loan scheme will elect for repayment in all cases or if it will be more selective. It might also put borrowers on notice to raise equity in advance to avoid the repayment. It is unlikely that the Future Fund would risk a rush of insolvencies in the UK’s start-up and early growth sector. In any event, however, borrowers and their venture capital investors should be considering their options – whether that is raising equity to ensure the Future Fund debt is converted, wider restructuring options, or a purchase of the Future Fund debt in anticipation of the date it becomes due.

How the Future Fund scheme works

The Future Fund is a government scheme to support UK-based companies ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. The scheme, alongside other government support measures, is designed to support companies facing financing difficulties due to the Covid-19 pandemic. The Future Fund, which is being delivered by the British Business Bank (BBB), officially opened for applications on 20 May 2020 and shut to new applications on 31 January 2021.

The scheme is focused on start-up and innovative firms and is aimed at supporting the UK’s strength in this industry. The Future Fund invests in companies by way of unsecured convertible loans on standard terms with a minimum interest rate of 8% and a conversion discount rate of at least 20%. To be eligible, a company must be based in the UK with a majority of its employees in the UK and with its parent company also being in the UK. The company must have previously raised at least £250,000 in equity funding.

Converting a Future Fund loan

A Future Fund supported convertible loan can be converted into shares in the company in a number of scenarios:

• Automatically on a “qualified financing” – when an equity funding raises an amount of at least the amount of the loan, the loan converts into the most senior class of shares. The borrower can elect to pay accrued interest or for that to also be converted.
• On election by a lender majority on a “non-qualified financing” – an equity raise that is not a qualified financing.
• On an “exit” – a sale of the company or substantially all its assets or a listing – where the lenders would receive a greater return from a sale of shares on conversion than on a repayment of the loan plus the redemption premium.
• Automatically on the maturity date.

However, the BBB can also call for repayment of the loan plus the redemption premium, which is equal to 100% of the principal amount of the loan:

• ·on an event of default, together with accrued interest – i.e. an insolvency event or breach of certain other covenants;
• ·on the maturity date if the BBB has given notice of its election to get repaid rather than converted no later than 10 business days before the maturity date;
• automatically if the BBB would receive more from repayment and the redemption premium than on conversion on an exit.

The three-year maturity date

We are now approaching the three-year maturity date for loans made by the Future Fund. If there is no intervening equity funding round or trade sale before the maturity date, the Future Fund and its co-investors may elect for repayment of the principal together with a redemption premium of 100% of the principal amount and accrued interest.

Alternatively, the Future Fund and its co-investors could choose conversion of the principal. Borrowers can elect to convert the interest or pay the interest on shares. Venture capital investors who have supported an investee company with a convertible loan seem likely to convert or extend the maturity date of convertible loans as opposed to calling in the debt.

However, borrowers have been put on notice by the Future Fund that if there is no conversion event prior to the maturity date, the Future Fund will be electing for a repayment of the principal amount of the loan plus the redemption premium on the maturity date. The Future Fund advises borrowers to “seek appropriate financial and legal advice if you are, or expect to be, unable to repay the principal amount of the loan, plus the redemption premium, on the maturity date”.